What is startup NDAs and what do you need to know about how they work? As an entrepreneur trying to grow your startup, you will often have to share sensitive information related to your business with outsiders. That is where NDAs or Non-Disclosure Agreements come in to protect your startup’s confidential data.
Some common situations where a startup may have to disclose sensitive information are when they are hiring consultants, fundraising, or selling their business. Having an NDA in place will not only prevent the signing party from misusing your startup’s sensitive information but also keeps them from sharing the information with others.
With that said, an NDA is not applicable to every single situation, and it can potentially put off a party if used incorrectly. Not to mention, if certain information about your startup is common knowledge, no one will be interested in stealing it from you, so no NDA would be needed. In addition, a lot of startup owners aren’t sure what NDA is, how it works, or what is included in this legally binding document. So if you are wondering what startup NDAs are all about and whether you need them or not for your venture, then we suggest you keep reading until the end.
The Ultimate Guide To Pitch Decks
Here is the content that we will cover in this post. Let’s get started.
- 1. What is a Non Disclosure Agreement?
- 2. What are the different types of NDA?
- 3. One-way NDA
- 4. Mutual NDA
- 5. What are some key components of an NDA?
- 6. Identifying the parties to the agreement
- 7. Description of sensitive information
- 8. Scope of the agreement
- 9. Exclusions from the agreement
- 10. Terms of the NDA
- 11. When to use an NDA and when to avoid them?
- 12. Startups should sign an NDA for:
- 13. Cofounders
- 14. Hiring employees
- 15. Hiring independent contractors
- 16. Startups should avoid signing an NDA for:
- 17. Fundraising
- 18. Hiring lawyers/Legal advisors
- 19. Conclusion
What is a Non Disclosure Agreement?
Before we jump into the ins and outs of startup NDAs, it is important to know exactly what this agreement is and what it does. In short, a Non-Disclosure Agreement’s sole purpose is to prevent an outside entity from sharing or using your startup’s information. When a party signs an NDA with you regarding your startup’s confidential data, they can not share confidential information or reuse it for their own gain. While ideally, a startup would want to keep their information to themselves, that is not really possible. So signing a startup NDAs is the next best thing.
Startups commonly sign Non-Disclosure Agreements with potential investors, partners, creditors, employees, advisors, clients, or suppliers. This agreement specifies what information is considered confidential and also specifies the duration for which the signing party is bound to keep the specified information confidential. With that said, it is important to state that while an NDA is a legally binding document, it doesn’t guarantee successful legal action against the breaching party. It does however provide the Non-Breaching Party legal basis to sue the breaching party using their own resources. However, it does discourage the other party from sharing sensitive data about the startup they are dealing with.
What are the different types of NDA?
An NDA for the most part protects the startups from any unwanted losses caused by someone using their data. However, in some cases, the other party may also be sharing confidential information of their own while receiving sensitive details about your startup. So you will have to use the right type of Non-Disclosure Agreement depending upon the type of information exchange taking place.
See How I Can Help You With Your Fundraising Efforts
See How I Can Help You With Your Fundraising Efforts
So, without further ado, here are the two major types of Non-Disclosure Agreements that every startup should know about:
Also known as a one-sided NDA, this type of Non-Disclosure Agreement is meant to be used when only you will be sharing confidential information about your startup with a third party. One-way startup NDAs involve the startup sharing information with a stakeholder, and the stakeholder must keep the information a secret and avoid any misuse of the said information.
A one-way NDA comes in handy when startups are hiring employees, contractors, advisors, or other entities that may have access to confidential information about the business. Another common application of one-way NDA is when a startup is negotiating with an investor and has to provide key business details to them to secure investment.
A Mutual Non-Disclosure Agreement is applicable in a situation where both the startup and the other party are sharing confidential information with one another. A Mutual NDA gives protection to both parties involved in the agreement, and it binds them to keep the mutually shared information a secret and prevent its misuse.
Mutual startup NDAs are mostly applicable in a situation where a startup is partnering with another business or merging with a company to combine their operations. Since both the startup and the other business will be sharing vital information with one another, a mutual NDA will protect the secrets of both businesses from being leaked out.
Keep in mind that in fundraising, storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
What are some key components of an NDA?
Despite offering protection to confidential business data, startup NDAs are surprisingly easy to create and can contain a few yet essential clauses. So when you are drafting an NDA, your goal should be to keep the NDA no more than a few pages long. However, before you start creating an NDA, it is important to know about the key components of the agreement. Let’s take a look at a list of all the important components of an NDA:
Identifying the parties to the agreement
Before an NDA is deemed effective, it must identify the parties that are bound by the agreement. That is why the first section of an NDA includes a description of the parties, and it also defines the disclosing and the receiving party.
However, identifying the parties in startup NDAs is not always straightforward, especially when the receiving party wants to share the received information with other parties. In such a situation, startup NDAs will also include third parties that might have access to confidential information.
Description of sensitive information
Not all information about a startup needs to be protected. Therefore, an NDA includes a description of sensitive information that the receiving parties need to keep confidential. Since a lot of information is exchanged during business transactions, this section also defines a method to identify confidential data. For example, the disclosing party may be required to add a confidentiality stamp to confidential documents so the receiving party knows it is confidential data.
Since the information conveyed during a business transaction can either be written or oral, it can get complicated to identify what oral information is confidential. A way around this problem for the disclosing party is to provide a written document in combination with confidential oral information so the receiving party knows it is confidential.
Scope of the agreement
A non-disclosure agreement puts the responsibility of keeping the information confidential on the recipient. So this section of the NDA specifies the responsibilities of the receiving party and the steps they must take to keep the information confidential. The scope of the agreement usually binds the receiving party to only disclose confidential information to a few relevant individuals within their organization. In addition, the individuals from the receiving organization that do have access to confidential information should clearly know the nature of it.
Finally, this section also prohibits the receiving party from using the shared information for their personal gains. The scope of the agreement section of startup NDAs become the basis of a lawsuit if the receiving party fails to keep the information confidential or uses it for their own benefit. So as a startup, you should try to keep the scope of the NDA as broad as possible and cover as much information under the agreement. A broader scope makes it easier for you to sue the other party in case of a breach.
Exclusions from the agreement
Not all information about your startup needs to be protected by a confidentiality agreement. Therefore the exclusions section of startup NDAs specifies any information that is excluded from confidentiality treatment. Here is a list of information that is commonly excluded from exclusivity treatment:
- Information that is public knowledge or already known by the receiving party.
- Any information that is known by the receiving party through another party that is not bound by the NDA.
- Information that the recipient is forced to disclose to the court to facilitate any legal proceedings.
Terms of the NDA
The terms are the most important section of an NDA as it governs the ways an NDA is going to be enforced and for how long it is enforceable among other terms. Generally, startup NDAs remain effective for around 3 to 5 years, however, as a startup, your goal should be to extend the duration of the agreement for as long as possible.
With that said, most information related to your startup may not remain confidential forever, so it is best to work with an attorney when figuring out the duration as well as other terms of startup NDAs.
When to use an NDA and when to avoid them?
If you own a startup, then it is advisable to have an NDA for your business that you can use when needed. However, it can be difficult for startup owners to know what scenarios call for the use of an NDA. To help startups in figuring out whether they need to sign an NDA or not, here are some situations where you should and shouldn’t sign an NDA:
Startups should sign an NDA for:
Many startups have more than one founder and even if cofounders are on the same page, it is still a good idea for cofounders to sign an NDA to protect the key information about the business. In an event where one or more cofounders decide to leave the startup, they might use the confidential information they have about the startup to launch a competing business.
So having startup NDAs in place between the cofounders discourages any of the founders from misusing their access to company secrets.
Employees are a major asset for a startup, however, it is highly possible that employees that are hired by a startup may leave sooner than expected. If an employee that had access to confidential company information leaves the startup, they might disclose this information to competing businesses.
Signing an NDA with the employees at the time of hiring makes sure that they are bound to keep the company secrets hidden even if they no longer work for the startup.
Hiring independent contractors
Similar to employees, hiring independent contractors involves sharing sensitive information with them which can pose a risk of information misuse. However, signing startup NDAs when hiring independent contractors prevents them from exploiting sensitive information they might have about a startup.
Working out whether or not to get an NDA signed is only one of the common mistakes when fundraising you might make. Check out this video where I have explained a few more pitfalls entrepreneurs should avoid.
Startups should avoid signing an NDA for:
While it is true that potential investors will have access to sensitive company information, insisting on signing an NDA with them can reduce your chances of securing funding for your startup. When you think about it, investors have to review several funding applications on a regular basis, and signing startup NDAs with each applicant would be time-consuming and impractical for them.
Not to mention, reputed investors and venture capitalists have a reputation to maintain, and they try to avoid any controversies that can harm their credibility. So, as long as you are approaching a reputed investor, you shouldn’t have to worry about putting your confidential information at risk.
Hiring lawyers/Legal advisors
Lawyers and legal advisors can help startups in sorting out many legal complexities. However, in order to help startups with their legal matters, legal experts need access to certain information that might be considered confidential.
With that said, lawyers similar to investors have a reputation to uphold, and therefore signing an NDA with them would not be necessary. Instead of signing an NDA, startups should always sign an engagement letter with the legal experts before they disclose any confidential information to them. An engagement letter includes a confidentiality clause, so it automatically protects any confidential information that is shared with the legal expert.
Using an NDA is almost always a good idea, except for a few scenarios mentioned in the previous section. Startup NDAs can be drafted once and can be modified every time you need to sign it. Now that you know all the basics of an NDA, you are in a better position to create and use it to protect your startup’s secrets.
You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.